The Communication Workers’ Union (CWU) is the largest union in the communications sector in the UK, representing over 200,000 employees in the postal, telecoms and related industries. It is the recognised union in the Royal Mail Group for all non-management grades.

The union welcomes the opportunity to submit evidence to the Business Innovation and Skills (BIS) committee inquiry into stamp prices. As the committee is aware, the postal industry has been experiencing a period of unprecedented change in recent years. The Postal Services Act 2011 allows for further significant change by allowing for future privatisation of Royal Mail, the transfer of a large proportion of Royal Mail’s pension assets and liabilities to government and the establishment of a new regulatory regime under Ofcom.

Ofcom has now taken over regulation of postal services and has been consulting on a new regulatory framework to take effect from April 2012. The regulator has recognised many of the failings of the previous regulatory regime and is proposing significant deregulation of Royal Mail’s products and services.

All universal service products—including stamps—are currently subject to price controls by the postal regulator; Ofcom now proposes the removal of price controls from all universal service products, with the exception of 2nd class letters under 100g which would be subject to a price cap. No proportionate price controls would be applied to other second class products, such as larger letters or parcels.

The principle driver for this change is to allow Royal Mail greater commercial flexibility. Ofcom rightly recognises that Royal Mail’s difficult financial position threatens the future sustainability of the universal service. Royal Mail has faced unprecedented circumstances in recent years: premature liberalisation, damaging regulation, the legacy of chronic underinvestment, a massive pension deficit, declining mail volumes and a modernisation programme requiring extensive change for workers.

Ofcom proposes to establish a regulatory regime which will stay in place for seven years, ending a period of regulatory uncertainty for Royal Mail. A review of the second class price cap is proposed after two years.

CWU Position

The CWU welcomes Ofcom’s acknowledgement that the long term viability of the universal postal service depends on Royal Mail’s ability to continue to provide that service. We have consistently argued that Royal Mail is the only operator capable of providing the universal service, and that previous policies which damaged the company’s financial position threaten the viability of the universal service.

In particular we welcome Ofcom’s proposals to deregulate non-universal service products, and to improve the downstream access regime. It is striking that many of the measures proposed by Ofcom in the business mail market simply establish regulatory parity between Royal Mail and its competitors. It is deeply regrettable that competition was allowed by the previous regulator to take place under unequal regulatory regimes, and is undoubtedly a major factor in Royal Mail’s loss of business to access operators and consequent financial difficulties. The CWU supports those proposals which seek to level the playing field between Royal Mail and its competitors.

The CWU accepts that increases in stamp prices will be necessary for Royal Mail to stabilise its financial position: there has been a long-term trend of stamp prices failing to keep up with inflation; falling mail volumes have meant increasing unit costs for the business; and international comparisons show that postal workers in this country deliver an impressive service at a good price.

Royal Mail needs to be able to increase revenue if it is to be able to have a successful future. Mail volumes are continuing to fall while the number of delivery points the business must visit everyday is rising. This will have a major impact on the sustainability of the universal service. Royal Mail needs to be able to cover these costs and to do so it will inevitably need to raise prices. This will apply to stamp prices as well as the price of business mail.

The Postal Services Act introduced the important condition that the universal service provider should be able to earn a commercial rate of return on expenditure connected with the universal service. We welcome Ofcom’s proposal to apply this to all activities in Royal Mail’s former Letters division.

However, while we recognise that stamp prices will need to rise, we do not wish to see the burden of sustaining the universal service fall solely on the users of universal service products. Large business mailers and Royal Mail’s private competitors benefit from the existence of the universal service and have benefited from the introduction of competition. They should play a major part in ensuring the sustainability of the universal service; either through prices which reflect its importance or, if this is not possible, through a form of universal service support fund.

We are concerned that Ofcom’s proposals might shift the balance of funding the universal service too far towards universal service product users and in so doing make it unaffordable. We believe the interests of universal service customers continue to require some protection.

An Affordable Universal Postal Service

The CWU believes it is important that the full range of universal service products remain affordable. We are concerned that Ofcom’s proposals might result in only one universal service product remaining affordable.

A universal postal service is by definition one which is affordable for all users. EU Directive 97/96/EC requires the government to ensure “a universal service…at affordable prices for all users.” (Ch 2 Article 3 s. 1).

Ofcom states its belief that: “it is essential that the role of the universal service in society is preserved and that the price of a basic universal service in society is preserved and that the price of a basic universal service is not allowed to rise above an affordable level” (Securing the Universal Postal Service, s. 1.44). The implication is that the regulator is only concerned that there be one affordable universal service product and would accept other universal service products becoming unaffordable.

We appreciate that the removal of price controls, or the setting of a cap, does not necessarily entail large increases in price. That will be a decision for Royal Mail who will of course make a judgement on profit maximisation and the likely effects on demand. Nonetheless, we believe it is desirable for the regulator to avoid the possibility of an increase in prices which would render universal service products unaffordable.

We are concerned that the current proposals raise the possibility that for some users at least, the only truly universal service would be for posting of a second class letter weighing less then 100g, while first class or larger second class post would have many of the features of the universal service, but not necessarily affordability.

Defining Affordability

Given the importance of ensuring affordability for all users, we are concerned that Ofcom’s approach to the issue of affordability does not appear to have considered the principle, or the impact of proposals, rigorously enough. Whilst we recognise that establishing a definition of affordability is not straightforward, we believe further consideration needs to be given to the issue of affordability before far reaching changes to the pricing of stamps can go ahead.

Ofcom has referred to Postcomm’s February 2011 discussion paper on affordability which claimed postal services represent 40p of the average £455 average weekly expenditure, and conclude this means postal services are affordable for consumers. Despite acknowledging that it has not undertaken any analysis of affordability for small businesses, Ofcom concludes that if prices are affordable for consumers they will also be for small businesses.

Ofcom seeks to argue that since postal services make up such a small proportion of weekly household spend, prices can rise significantly and still be deemed affordable. While this argument seems initially compelling, it fails to establish an objective standard for assessing affordability, or to take into account the needs of business or vulnerable users.

We are concerned that Ofcom’s analysis does not appear to establish what would constitute an unaffordable increase. A tenfold increase in postage costs would still constitute a very small proportion of average expenditure, but may well make the service unaffordable for many users.

While we disagreed with Postcomm’s 2011 analysis of affordability, it had the advantage of establishing a firm test for what level of increase would be unaffordable. Any serious attempt to protect affordability ought to do the same.

Postcomm considered the Joseph Rowntree Foundation (JRF) “Minimum Income Standard” as an alternative method of assessing affordability. JRF concluded that around £3 per week could be allocated to postage from minimum income budgets, which would need to cover three first class stamps as well as the cost of paper envelopes and pens to write the letter with. Postcomm were satisfied at the time that these requirements would be met, noting that “The weekly figure is more than enough to cover the cost of three first class stamps.”. It is not clear that under the current proposals the cost of three 1st class stamps would remain within the limits of the £3 budget. We recommend Ofcom re-examine the merits of adopting a more developed definition of affordability, such as the Minimum Income Standard.

Impact Assessment

We believe that further analysis of the impact on users of proposed changes to stamp prices is required before such far reaching changes are implemented. In particular, we believe Ofcom should have greater regard for the needs of small businesses and vulnerable domestic consumers.

We do not support the assertion that small business needs can be inferred from domestic consumer budgets. Small businesses are very dependant on stamped mail. The Federation of Small Businesses has found that 90% of small businesses use stamped mail and use the post office to buy stamps and send mail. Changes in stamp prices for both 1st and 2nd class stamps are likely to have impacts on business models and viability of small businesses, and their needs deserve greater attention.

Vulnerable domestic consumers including the disabled and those on low incomes are likely to have expenditure profiles which differ substantially from the average. Serious consideration should also be given to the effect of price changes on vulnerable people who do not have internet access, and are therefore likely to bear the brunt of price increases, as highlighted by Consumer Focus in their report1 on potential impacts of stamp price increases on consumers.

Monitoring

We are also concerned that the monitoring of the effects of the changes to the pricing regime is insufficient to protect users. Ofcom state their intention only to review the second class price cap, and that only after two years. We would like to see the regulator retain more robust monitoring and control mechanisms to ensure universal service products remain affordable. Ofcom should fully assess the impact of price rises on domestic consumers and small businesses on an annual basis.

Economic Context

The timing of these proposals is also a cause for concern. Domestic consumers are enduring the biggest squeeze on living standards in living memory, while the difficulties facing small businesses are well documented. The Federation of Small Business reports plummeting confidence in the sector, with their Small Business Index reaching record lows. We believe there has been insufficient consideration of the broader circumstances facing users, which impact on affordability and Royal Mail’s long term customer base.

Competition—Who Benefits?

As Richard Hooper acknowledged in his interim report of May 2008, universal service users have not seen the benefits of competition, which have largely profited larger business customers. Prices of universal service products have risen sharply since competition was introduced, while service levels have reduced, for example through later deliveries and earlier collections. We do not believe universal service users should be responsible for paying for damage done to Royal Mail’s finances by early liberalisation and poor regulation.

Considering Alternatives

Royal Mail needs to generate additional revenue to sustain the universal service. Increasing stamp prices is one way of contributing towards this, but it should not be the only way. Ofcom needs to look at alternatives if it is to ensure a sustainable and an affordable universal service. To this end we would like to see the regulator address the balance of price increases to ensure that large business mailers and private competitors—who have benefited from competition and from the universal service make—make an adequate contribution to sustaining the universal service. If this cannot be achieved through pricing, we would like to see the regulator consider alternatives such as a universal service support fund.

Conclusion

The CWU welcomes the new regulatory framework for non-universal service products, and the recognition of the importance of Royal Mail’s financial position for the long term viability of the universal service. Royal Mail faces a very challenging commercial environment, with falling mail volumes and increasing delivery points. The company must be able to increase revenues if it is to have a sustainable future and this will mean price rises.

Ofcom’s duties to ensure the sustainability and the affordability of the universal service stand side by side. The current proposals however potentially prioritise sustainability above affordability and risk creating a two tier universal service, with some services becoming unaffordable for important groups of consumers.

The universal postal service needs to be sustainable and affordable to fulfil its crucial role in society, and a failure to ensure either aspect would represent regulatory failure. While universal service product prices will need to rise, Ofcom must ensure the right balance is struck; universal service product users should not bear the full burden of the cost of sustaining the universal service. Business mailers and private mail operators who have benefited from competition and the existence of the universal service network must contribute more to its future financing. We are concerned by the potential implications of Ofcom’s proposals and urge the regulator to consider alternatives, including the possibility of a universal service support fund.

While it is important to assess whether the affordability risks to the universal service are necessary to make it sustainable, we would also like to stress the significant improvements Ofcom is proposing regarding regulation in areas beyond universal service pricing.